1. Economy is operating at full employment price of oil up; therefore, there leads to left shift of AS. For short run: there is an increase in P and a decrease in Y (P up, Y down). For long run: As Y2-b) If the Federal Reserve decided to offset any adverse effects on output, that is the recession. It could solve the problem of recession by the expansionary monetary policy. There is a twin problem here: 1. Recession (Y2P1). If the Fed really solve the problem of recession by expansionary monetary policy, there is a right shift of the AD curve (Y2-> Yf/Y3). For the supply shock, if output is increased to solve the problem of recession; inflation increase even (P3>P1).
For the demand stock, Fed would try to fight recession by expansionary monetary policy (AD shift right) and boom by contractionary monetary policy (AD shifts left).
2. Equilibrium output is the level of output at which the demand line cross the 45?Line. Total demand = level of output. Y> C+Ip: More goods are produced than the consumers and firms are wanting and buying. Firms will react to this by cutting back on production. The level of output will fall until the economy reaches the equilibrium.
3. If the Fed wants to increase the money supply through open market operation, the government can buy bonds in the market, then money supply will increase. When government hold bonds, public hold money.
In short run, aggregate supply curve, it is upward sloping. The Aggregate Supply curve is relatively flat because in the short run, firms are assumed to supply all the output demand with small change of price be ...